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These days, upbeat reports on Japan are seen about as much as Keizo
Obuchi's 2,000 yen notes. That's why the Pacific Council on
International Policy's recent report on Japan seems so unusual. "We
believe that the fashionable notion of a Japan in inexorable decline
is misleading," the council's task force says in its 52-page report
entitled "Can Japan Come Back?"

The council, a private group of business and political leaders in the
western US and around the Pacific Rim, formed the task force to study
Japan during 2001 and 2002. Members include former US ambassador to
Japan Michael Armacost, Glen Fukushima of Cadence Design Systems,
Joichi Ito of Neoteny and a slew of retired executives, working
journalists and academics.

This group concludes that the key to Japan's success lies with its
women, immigrants, foreign investors and small businesses. (Can you
hear the right-wing sound trucks starting their engines?) The council
finds that as the nation's demographics change, these groups will
become more and more important to the economy, and government-led
reform to help these groups is needed in the near term to ensure that
Japan gets stronger.

"The Japanese government must do much more to encourage the drivers of
change that will make the economy more competitive ・ small- and
medium-sized enterprises, corporate reform, women, immigrants, and
foreign investors and employers," the report says. "To help SMEs, for
example, the government needs to develop a tax system that positively
encourages ・ and does not discourage ・ entrepreneurial activity and
risk-taking. The government, which has long fostered major industry,
needs to develop more effective policies for nurturing SMEs. To bring
more women into the work force, the government needs to enforce
existing anti-discrimination laws and bolster social services such as
day care. Meanwhile, official barriers ・ and attitudes ・ to a
dynamic foreign presence in Japan need to ease."

If these changes take place --and the council seems cautiously
optimistic that they will -- then Japan will thrive, the council says,
and anyone writing off the world's second largest economy does so at
his own risk. "With China rising, some see Japan as a second-tier
power of only modest relevance to the future of Asia and to the United
States as a trading and strategic partner. That judgment, however, is
wrong ・ dangerously so."

The council's optimism comes, in part, from a sense that some
artificial obstacles to change here will crumble under the weight of
demographic change. For example, the council notes that, according to
one source, there were only 31 bankruptcy lawyers in the nation a few
years ago, which meant corporate bankruptcies couldn't proceed quickly
even if the companies wanted them to. The council also notes that
Japan is suffering a net outflow of 130,000 people a year with an
average age of 38.5. And 70 percent of these people are women. These
stats are staggering -- a country desperately in need of young people
to power its economy and to promote change is incapable of keeping
them.

Part of the problem, the council says, is that much of the old system
is still in place. Bureaucrats still hold too much power, there is
still way too much corporate corruption, and the old boys still have
too much influence. Consider Shiseido, a company that makes products
for women. The board is all male and many of these guys are elderly,
the council says. Couldn't Shiseido find one woman qualified to sit on
the board of a cosmetics company?

The council puts a lot of faith in the new generation of political
leaders. This is probably the weakest part of the report. Anyone
following the hopeless attempts of the young Democrats to oust Yukio
Hatoyama and Naoto Kan from party leadership will probably agree.
Being young does not equate with being effective.

But still, much of the report makes sense. There's always a bit of
wishful thinking in the doomsday scenarios that flit through the
foreign populace in Japan. This report seems much more real and to the
point.

Since we don't get a lot of upbeat news on Japan these days, let's end
here, at one of the council's most optimistic points: "Japan痴 global
influence is not limited to investment. Japan continues to be a world
leader in high technology, a leadership based on an educated work
force and a history of product innovation. It has also become a major
exporter of popular culture, particularly to the rest of Asia, where
its television programs, music, food and fashion have legions of fans.
Indeed, it is not difficult to imagine Tokyo becoming the center of an
Asian pop-culture and entertainment industry rivaling Hollywood in the
Far East."

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** Nissho Iwai, Nichimen to Merge; Lehman to Invest in New Firm

In Brief: Trading houses Nissho Iwai and Nichimen agreed to integrate
their businesses under a holding company to be set up in April, the
Nihon Keizai Shimbun reported. US investment bank Lehman Brothers will
be a major investor in the business and will be able to send
executives to the company.

Nissho Iwai is Japan's sixth biggest trading house, and Nichimen is
the eighth. The new integrated firm will try to boost its capital by
200 billion yen through investments from Lehman and UFJ Bank.

Commentary: What's most interesting here is the role being played by
Lehman. UFJ Bank is under pressure to rebuild some major borrowers, as
the Nikkei reported, and Lehman's involvement will help speed the
rebuilding process. Lehman is expected to invest tens of billions of
yen in the firm. The Nikkei also reported that the two trading houses
feel the presence of Lehman in the rebuilding phase will help to quell
any squabbles between Nichimen and Nissho Iwai. So the foreign
investor is also being looked to as a peacemaker in this case.

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** DoCoMo's Stake in KPN Shrinks to 2.2 Percent

In Brief: NTT DoCoMo refused European telecom company KPN's request
for more cash this week, thus diluting the Japanese telecom company's
stake in KPN from 15 percent to 2.2 percent, the media reported.
DoCoMo's investment in KPN in the late 1990s was supposed to be a
linchpin in a global 3G strategy that has for the most part fizzled.
The news was expected by KPN as DoCoMo has been distancing itself from
its foreign investments for some time.

In Brief: Laox and other chain retailers are selling XBox consoles at
discounts of as much as 20 percent under Microsoft's recommended price
in a bid to move the unpopular machines during the holiday season,
Bloomberg reported this week. Laox, Sofmap and Sakuraya all sell the
console for 19,800 yen. The price includes a remote controller that
Microsoft started offering for free in late November to try to help
sales.

Commentary: Bottom line: XBox needs more attractive games. We've heard
the rumors that Microsoft is thinking of buying Sega. Microsoft denies
these reports, but we say, what are they waiting for? A proven game
producer like Sega is exactly what XBox needs in the long run.